Mannatech, Incorporated (MTEX) Q1 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the Mannatech Inc., First Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Now, I’d like to introduce our moderator for the call today, Mr. David Johnson, Chief Financial Officer. Mr. Johnson, you may begin.

Thank you. Good morning everyone. This is David Johnson and welcome to Mannatech’s First Quarter 2018 Earnings Call. Today you will hear from both me and Mannatech’s President and Chief Executive Officer, Mr. Al Bala. Before we begin the call, I will first read the safe harbor statement. During this conference call we may make forward-looking statements which can involve future events or future financial performance. Forward-looking statements generally can be identified by the use of phrases or terminologies such as will, continue, may, believe, intend, expects, potential, should, could, would, anticipate, estimate, project, predict, hope, feel, plan and other similar words or the negative of such terminology. We caution listeners that such forward-looking statements are subject to certain events, risks, uncertainties and other factors and speak only as of today. We also refer our listeners to review our SEC submissions. In addition to results presented in accordance with the generally accepted accounting principles, GAAP, I will discuss a non-GAAP financial measure, constant dollar net sales, which is sales that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S. dollars. I believe that this non-GAAP financial measure provides useful information to investors, as it is an indicator of the strength in the performance of our ongoing business operations. This non-GAAP financial measure should not be considered an exclusive alternative to accompanying GAAP financial measures. A reconciliation of this non-GAAP financial measure to the mostly directly comparable GAAP measure is available on our recently filed 10-Q under the heading Non-GAAP Financial Measures. At this time, I will make a few comments concerning our first quarter of 2018 operating results. Net loss was $0.3 million or $0.10 per diluted share for the first quarter of 2018 as compared to $1.2 million or $0.46 per diluted share loss in the first quarter of 2017. The first quarter of 2018, net sales increased by $0.8 million or 2% to $41.4 million as compared to net sales of $40.6 million for the first quarter of 2017. For the three month period ending March 31, 2018 our net sales declined by 2.5% on a constant dollar basis. Favorable foreign exchange caused $1 million increase in our GAAP net sales as compared to the same period in 2017. The net sales comparisons for the three month period ending March 31, 2018 and March 31, 2017 were also affected by the average value of product orders and the number of pack or associate fee orders placed. The average product order value increased 22.4% to $197 for the three months ending March 31, 2018 as compared to $161 for the same period in 2017. The number of packs sold to, and associate fees paid by new and continuing independent associates and preferred customers decreased 27.3% during the first quarter of 2018 to 20,738 as compared to 28,516 during the same period in 2017. The total number of active associate positions held by individuals in our network based on a 12 month trailing period ended March 31, 2018 and 2017 was approximately 210,000 and 220,000 respectively. For the first quarter of 2018 our operations outside of the Americas accounted for approximately 66.9% of our consolidated net sales compared to 61.8% of our consolidated net sales for the first quarter of 2017. Asia-Pacific net sales increased by $2.3 million or 10.5% to $24.2 million in the first quarter of 2018 as compared with the same period in 2017. This increase was primarily due to a 29.2% increase in revenue per active independent associate and preferred customer, which was partially offset by a 14.5% decline in the number of active independent associates and preferred customers. During the three months ending March 31, 2018 the loyalty program decreased sales by $0.1 million as compared to the same period in 2017. Foreign currency exchange had the effect of increasing revenue by $1.4 million for the three months ending March 31, 2018 as compared to the same period in 2017. The currency impact is primarily due to the strengthening of the Korean won, Japanese yen, Australian dollar, Chinese renminbi, Taiwanese dollar, New Zealand dollar and the Singapore dollar, partially offset by the weakening of the Hong Kong dollar. Europe, the Mid-East and Africa or EMEA net sales increased by $0.3 million in the first quarter of 2018 to $3.5 million as compared to the same period in 2017. The increase was primarily due to a 20.3% increase in the number of active independent associates and preferred customers, partially offset by a 9.1% decrease in revenue per active independent associate and preferred customer. Foreign currency exchange had the effect of increasing revenue by $0.4 million in the three month period ending March 31, 2018 as compared to the same period in 2017. The currency impact is primarily due to the strengthening of the South African rand, British pound and the euro. Americas net sales decreased by $1.8 million in the first quarter of 2018 to $13.7 million as compared to $15.5 million in the same period in 2017. This decrease was primarily due to 11.7% decline in revenue per active independent associate and preferred customer, partially offset by a 0.1% increase in the number of active independent associates and preferred customers. Our operating income for the first quarter of 2018 was $0.9 million as compared to an operating loss of $2 million in the first quarter of 2017. During the first quarter of 2018, selling and administrative expenses decreased to $8 million as compared to $8.7 million during the first quarter of 2017. The decrease in selling and administrative expenses consisted of a $0.9 million decrease in payroll costs in our headquarters Japan and European offices, offset by a $0.2 million increase in marketing-related costs. For the three months ending March 31, 2018, other operating costs increased by $0.8 million or 11.3% to $8.5 million as compared to $7.7 million for the same period in 2017. For the three months ending March 31, 2018 other operating costs as a percentage of net sales increased to 20.7% from 18.9% for the same period in 2017. The increase in operating costs was primarily due to a $1.1 million increase in non-recurring office expenses incurred with our corporate office move, which was partially offset by a $0.3 million decrease in legal and consulting fees. In reviewing the balance sheet at March 31, 2018, our cash and cash equivalents increased by $0.2 million to $37.9 million from $37.7 million at December 31, 2017. During the three months ending March 31, 2018 we invested approximately $0.3 million in back-office software projects. We also acquired an additional $1.3 million in leasehold improvements for the new corporate office acquired through financing arrangements. For the three months ending March 31, 2018 and 2017 the company’s effective tax rates were a benefit at the rates of 53.7% and 36.5% respectively due to operating losses. Our working capital defined as total current assets less total current liabilities was $22 million at March 31, 2018 compared to $22.8 million at December 31, 2017. Our net inventory balance decreased by $0.4 million to $9 million at March 31, 2018 compared to $9.4 million at December 31, 2017. During the three months ending March 31, 2018 finished goods inventory turns increased to 2.62 as compared to 2.34 for the same period during 2017. Also during the first quarter we paid $0.3 million in dividends. At this time, I will turn the call over to Mannatech’s CEO, Mr. Al Bala.

Thank you, David. Hello everyone, and thank you for joining us on our first quarter earning call for 2018. I am Mannatech’s CEO and President, and I would like to discuss the company’s first quarter. In the first quarter we experienced a flattening of net sales, with a slight increase in Q1 2018 of $0.8 million or 2% compared to the first quarter of 2017. On a quarter-to-quarter net sales, we decreased by $5 million or negative 10.7% compared to Q4 of 2017. While our net sales for the first quarter were very much in line, we had normal seasonal pattern of sales. It was impacted in 2018 by lengthy Asian New Year celebration and the first quarter week-long Hong Kong incentive trip to the Gold Coast of Australia with 200 of our top Hong Kong and Canadian, Chinese leaders. The first quarter was also impacted with our move to our new headquarters in Flower Mound, Texas in the middle part of March, which created some business interruptions affecting sales for Q1, and an increase in operating costs primarily due to the $1.1 million in nonrecurring office expense incurred with the move. In January of 2018 we promoted and added new responsibilities to a pair of senior members on the executive team, Mr. Landen Fredrick and Mr. Joel Bikman. Landen Fredrick, previously the Senior Vice President of Global Operation, was promoted to Chief Global Sales Officer and President of North America. Landen will coordinate worldwide sales activities and have direct P&L responsibility for all sales activities in the USA and Canada and the rest of the Americas. This was a strategic move to focus on the declining Americas sales and to continue to streamline the sale processes around the world. Mr. Joel Bikman, previously the Senior Vice President of Sales and Marketing was given new additional responsibility over supply chain, logistics and facility and was promoted to Chief Operating and Marketing Officer. He will continue to lead the company’s marketing and research and development activities. Our rapid new product introductions and the supply chain transformation process have worked together to improve our ability to take our ideas and move them through the innovation pipeline and into the markets more quickly. In this new role, Joel will continue to oversee the current trends of increased operational efficiencies and reduction of our selling and administrative expenses to maximize our bottom line. In January of 2018 we held our annual global leadership summit in Hawaii, where we unveiled our vision for 2018 and beyond to our top leaders from around the world. They also had the unique opportunity to get a close-up look at two of our newest products which were released during our annual global event called MannaFest, which occurred at the end of April of 2018. Our top leaders were introduced to the most powerful Ambrotose products ever created at Mannatech, Ambrotose LIFE powder. Leveraging advancement in scientific and ingredient research, Mannatech improved the Ambrotose formula by adding in new clinically tested ingredients to boost its immune, cognitive, mood and gastrointestinal benefits. Additionally, Ambrotose LIFE has more Manapol powder than in any other product and double the amount of Manapol powder of its top-selling product, Advanced Ambrotose powder. Mannatech’s Manapol contains the highest concentration of acemannan found anywhere. Acemannan is a potent polysaccharide found in the inner gel of the aloe vera leaf. It is what gives aloe its ability to support cell-to-cell communication in the body. For more than 20 years Ambrotose has been recognized as one of the most powerful nutritional supplements in the world, one that supports your immune system, improves cognitive function and supports gastrointestinal health. We have sold more than 3 billion worth of Ambrotose during that time, and we believe that Ambrotose LIFE will do more for your health than any other combination of product ever developed by Mannatech. Our core Ambrotose powder technologies have been fully validated by 10 different third-party clinical studies and the natural ingredients in Ambrotose LIFE powder provide important compounds called glyconutrients. Ambrotose LIFE will be available in two different forms, unflavored powder in a canister and a citrus-flavored powder available in convenient single-serving slim sticks. Ambrotose LIFE will first be available in North America on June 1, 2018 and then made available to Mannatech’s independent sales associate in other parts of the world thereafter. Our top leaders were also introduced to another blockbuster new product in the sports and fitness category; we call it EMPACT+. This new all-in-one fitness drink is the first sports drink to ever combine the major elements of fueling, hydration and recovery into a single drink. The EMPACT+ fitness drink is a natural alternative to sport and energy drinks that contain stimulants, artificial colors and/or artificial sweeteners. This new drink is designed to increase endurance, shorten recovery time in elite athletes. It also supports anyone with an active lifestyle. EMPACT+ fitness drink was also introduced on stage at Mannatech 2018 and will be available in the U.S. on June 1, 2018 and other countries later in the year. For more details related to these new products, please refer to our previously released press release. With the continued maturing of our new compensation plan designed to incentivize new customer acquisition and product sales, we experienced an increase in the size of average order by 22.4% to $197 for the three months ended March 31, 2018 as compared to $161 for the same period in 2017. This continued trend of average order increase speaks largely to the continued consolidation effect among our associate, some with multiple associate position in the company. This account consolidation has in part been responsible for the reduction in the number of new and continuing independent associates and members’ position held by individuals in Mannatech, from 220,000 to 210,000, a 4.5% reduction. In Q1 we continued to experience a decline in recruiting, which is largely attributable to the change in our compensation plan that was intentionally designed to clearly delineate customers from business-building associates, while strategically favoring new customer acquisition. New associates through a modest registration fee clearly choose to be business-building associates, separating them from those who previously joined Mannatech as associates to just get a better discount on products. We expect this phenomenon to continue for a few more quarters until we have completely purged the system through our annual paid renewal process for business-building associates. These strategies help us better align with industry-wide new compensation plan directives. We also continue to work on sales initiatives, digital tools and online funnels that will create more opportunities for our associates to attract and recruit new business-building associates. In Q1 we continue to experience a steady rise of sales from our cross-border e-commerce business in China, while we continue to invest in human infrastructure and e-commerce technologies to gain further market share in China. Our first quarter results demonstrate our commitment to shareholder value through strong institutional cost control, as demonstrated by the continued lowering of our selling and administration expense, while investing in the new products and new product categories that will ensure continued top line growth into the future. With continued focus on top line growth, cost management and bottom line profit improvements, we will accelerate Mannatech’s global growth opportunities and market share expansion in a very dynamic and globally vibrant wellness and direct sales industries. Thank you for joining us here today.

Thank you for listening to Mannatech’s First Quarter 2018 Earnings Call. As a reminder, company information and filings can be found at the company’s Investor Relations website, ir.mannatech.com or by reviewing SEC submissions. This concludes today’s call.